Thursday, April 22, 2010

Own the Fed — the Program, Part VII: The Case for Capital Homesteading

Despite all the hype (or, possibly in some measure, because of it), the economy has not recovered from the Great Recession. On the contrary, notwithstanding the phenomenal recovery of the stock market in less than a year (recovery of the market after the Crash of 1929 took more than twenty years to reach previous levels), the economy, and thus the whole of the social order, is in very bad shape indeed. If nothing else, the remarkable slowness of the recovery for those sectors of the economy not directly tied to Wall Street is a very unsettling phenomenon.

Part of this, of course, may be due to the massive increase in government spending. Just as in the 1930s, when borrowing (and thus money creation) by the federal government increased phenomenally, (Harold G. Moulton, Capital Expansion, Employment, and Economic Stability. Washington, DC: The Brookings Institution, 1940, 32-37), industry, commerce, and agriculture are starved for capital credit. This is especially true when lending institutions assume that bank credit is a commodity in limited supply, and require existing accumulations of savings and investment as collateral. When the government seems to be using up the "supply of loanable funds" at a tremendous rate, the assumption is that there is nothing left for the private sector. This is not true, but it makes no difference if people, especially policymakers and Federal Reserve authorities believe it to be true.

Then there is the plight of the ordinary wage worker — which in today's society, characterized by enormous concentrations of wealth, means the vast number of Americans. A quick glance at the "official" versus "real" unemployment rate — the leading economic indicator closest to the knuckle for most of us — is revealing. In March of 2010, the "official" unemployment rate posted on the website of the Bureau of Labor Statistics was 9.7%. In another part of the website, the real unemployment rate was given as 17.5%. (http://www.bls.gov/cps/) In September of 1932, the unemployment rate without the various redefinitions and adjustments essential for the peace of mind of today's politicians was 17.4%. Further, both the "official" and real employment statistics fail to take into account three very important factors.

One, the unemployment rate only includes those people who are seeking wage system jobs. In the 1930s, there was still a significant population of small owners. Since that time, small ownership has become a most unusual exception, while making a living without having a wage system job is almost unheard of today. The common perception among a great many people in our day and age is that "self employed" is a euphemism for "unemployed."

Two, the 1960s saw a great many women enter the workforce. In the 1930s it was still unusual for a woman to work outside the home, despite the "sex change" seen in a number of occupations due to the drain in the number of men available for work in the private sector as the country mobilized for war in 1916-1917. The Second World War saw even more women enter traditionally male occupations, although this was seen as temporary at the time. The shift did not become permanent until the 1960s, vastly increasing the size of the labor force, and for a time reviving interest in the discredited "wage fund doctrine" to try and explain why single-income families were not able to make it financially. (Within the analytical framework of binary economics, the inability for a single wage-earner to support a family is not due to a fixed "wage fund" being spread out among an increasing population of workers. The lowering of real wages results from a decline in the value of human labor relative to capital in the production process. This forces more people in the family to enter the workforce in order to maintain an adequate level of income.)

Three, the objective numbers of people included in the unemployment rate is far greater than it was in the 1930s. Part of this is due to the increase in population, of course, but the proportion of the population relying exclusively on wages for an income (one) and the addition of women to the workforce (two) is also significant. In order for us to compare the 1932 unemployment rate to the 2010 unemployment rate accurately, we would need to adjust the 2010 unemployment rate by some factor to allow for the additions in one and two. This, however, is outside the scope of this survey.

The real problem, however, is that the authorities and various experts and cheerleaders are looking at the wrong sector of the economy. Virtually all effort — to say nothing of a few trillion dollars — has been channeled into bailing out failed gamblers and speculators on Wall Street. Almost nothing has been done to "create jobs." Instead, another trillion-dollar hit is in the offing for American business in the form of the projected costs associated with the new healthcare mandate. Adding costs of such magnitude to businesses already in trouble has the potential to drive companies out of business, force them to shift to cheaper labor in other countries, and — for those able to do so — accelerate the changeover to technology that doesn't belong to unions, doesn't vote, and can be scrapped or sold when it wears out, breaks down, or becomes obsolete.

Of course, emphasizing job creation begs the question. Should we, in fact, be trying to redistribute or divert wealth by maintaining people in jobs everyone knows are pointless? Or should we restructure the system so that those same people can own the machines that produce the bulk of our marketable goods and services?

Still, efforts to create jobs, however ill-conceived, are at least well-intentioned, and not obviously directed toward feathering the nests of revolving door opportunists. At best, job creation is a complicated way of redistributing production which nevertheless acknowledges, however watered-down, the importance of producing before redistributing. What is needed is some program that will open up ownership opportunities in a way in which every man, woman, and child in the United States and, eventually, the world can share in economic growth.

Yes, things are very, very bad, but they could be much worse. Regardless how bad matters get, if there is a viable plan — and there is one — it is always possible to turn the situation around.

Any plan should not, however, be designed to address an emergency situation alone. Aside from the fact that any emergency presents special problems of its own, people always have the temptation to take a program designed for an emergency situation and try to keep in place permanently, or to apply it to ordinary, rather than extraordinary situations.

Take, for example, the wage system. As Ryan pointed out in his landmark study A Living Wage (1906), the wage system presupposes an extremely artificial condition of society: one in which the vast number of people own no appreciable amount of capital, and are forced to subsist entirely on wages paid in exchange for selling labor. The natural way to gain a living income is to work with what you own, so that the income generated by both capital and labor flow to the person most directly responsible for production.

As Kelso and Adler explain in The Capitalist Manifesto, however, that which ordinarily gives the right to the income generated by either labor or capital is private property in the means of production. As the authors explain, "It is only through his productive property — his capital instruments or his labor power — that a man can participate in the production of wealth as an independent contributor. The slave whose labor power is owned and used by his master is not an independent contributor; hence he cannot, as a matter of strict justice, claim any share in the distribution of the wealth produced." (The Capitalist Manifesto, op. cit., 53.)

If human labor is the sole factor of production, then the laborer (unless he or she is a slave) is due all marketable goods and services produced. If capital is the sole factor of production, then the owner of the capital is due all marketable goods and services produced. If both labor and capital are factors of production, then the marketable goods and services produced (or, more accurately, the profits generated by sale of the marketable goods and services) are divided between the owners of labor and of capital, respectively, on the basis of the relative value of the inputs.

Since it is difficult to impossible to determine the physical ratio of what the human factor and the non-human factor contribute, this is best determined by paying labor the going market rate, with the owner(s) of the capital retaining any profits. This is not perfect, of course. If a marketable good or service generates a loss rather than a profit, labor still must be paid the agreed-upon price instead of sharing in the loss; "labor" and "capital" must work together, but they are not true partners unless the same individual contributes both labor and capital.

We've examined today's situation at some length, and concluded that with regard to its institutional structures the country is probably in worse shape than it was during the Great Depression. Further, the groundwork has been laid for a financial and economic meltdown from which there will be no recovery — if we limit ourselves to traditional "solutions."

Obviously the country is in a state of emergency. That being the case, a redistribution of wealth may be necessary in the short run — meaning less than a year — in order to keep people alive and healthy in a manner otherwise consistent with the demands of human dignity. That, however, is only a tolerable expedient as long as the emergency lasts. When a program of redistribution lasts longer than the emergency, or an emergency is artificially prolonged by keeping people dependent on redistribution for their subsistence, it becomes unjustified, even tyrannical — the establishment and maintenance of the Servile State.

Since, as we have seen, the current emergency is clearly artificial, refusal to implement necessary correctives at the earliest possible moment would be classified as tyranny . . . if policymakers were aware of a program consistent with the principles of the Just Third Way. As long as they remain in honest ignorance, however, we must continue working to bring a just solution to their attention.

This raises the question of what constitutes a just solution. It must, of course embody the "four pillars of an economically just society" we have already mentioned. Briefly, these are 1) a limited economic role for the State, 2) free and open markets, 3) restoration of the rights of private property, and 4) widespread direct ownership of the means of production. That being said, what are some of the specifics of a program?

To answer that question, we have to begin at the beginning — with production, where everything starts. In less economically depressed times, productive capital in the U.S. economy increases annually in both the public and private sectors at a rate of approximately $7,000 for every man, woman and child. If financed in the usual way, that is, in a manner consistent with the dogmatic beliefs of the Currency School, virtually all of this new capital ends up being owned by those who already own (or, increasingly these days, control without owning) existing accumulations of savings. Few if any new owners will be created by means of traditional financing methods and assumptions.

This circumstance has led to a growing wealth gap. Most people own nothing or virtually nothing in the way of income-generating assets. They are completely dependent on their wage system jobs, welfare, or charity to meet their subsistence needs. Even in a dire emergency, many people have no financial resources, even home ownership, on which to survive.

A proposal we call "Capital Homesteading" is designed and intended to remedy this deplorable situation. Capital Homesteading does this in a manner consistent with the natural right to private property, free market competition, and limited government intervention to emphasize voluntary choices among producers and consumers. Capital Homesteading works to lower or remove barriers to full participation in the economic common good.

The goal is to open up the means by which those who do not own income-generating assets can become capital owners — but without taking anything away from current owners, except for the monopoly current owners now enjoy over future ownership opportunities. In common with Abraham Lincoln's 1862 Homestead Act, Capital Homesteading is directed toward a frontier, but the capital frontier. The capital frontier, unlike the land frontier, is effectively unlimited. Capital Homesteading has the potential to restore the American Dream of liberty and justice for all that a century and a half of poorly structured financial institutions and unsound monetary policy has eviscerated.

The basic structure of the Capital Homesteading proposal is an integrated system of income, gift, retirement, and inheritance tax reforms. Most importantly, tax reforms are combined with changes in monetary policy — even a change in our essential understanding of money, credit, and banking — that will effect fundamental changes in national economic policy. The goal of Capital Homesteading is to provide every man, woman, and child with an equal opportunity to own, control, and enjoy the profits generated by ownership of productive capital.

This is where Capital Homesteading becomes incomprehensible to anyone locked into the assumptions of the Currency School. The basic assumption of the Currency School is that capital formation can only take place after cutting consumption, saving, then investing. This is an absolute dogma — even though it begs the question as to where the first production came from if cutting consumption must take place before saving and investment . . . and production.

Politically or economically there is no reason why those who currently have a lock on capital ownership should be the only ones who own capital. We have seen that the State does not create money (not legitimately, anyway), and, with more than half of the money supply provided directly by the private sector in the form of promissory notes and similar instruments, it cannot claim to control the whole of the money supply. The State, however, does have an essential role to play in regulating the value of the currency and enforcing such standards as will ensure its stability. This is the same responsibility the State has to set the standards of weights and measures and ensure that everyone adheres to those standards.

Money and credit are thus uniquely "social goods" to which everyone should have access as long as they meet certain minimal requirements, just as they would in registering to vote. Obviously, the primary requirement would be a property right in the present value of existing or future marketable goods and services, but there would necessarily be other requirements as well, such as access to collateral in the form of capital credit insurance, good character, and so on.

The fact is that a political democracy cannot long survive conjoined with an economic plutocracy, especially when the authority of the State is thrown behind the economic elite, supporting it and providing a foundation for its continued ascendancy. Only decentralized wealth — and decentralized control over and access to money and credit, the chief means by which ownership is acquired — can counter the corrupting influences of today's intensely concentrated wealth. The State should therefore assist in lowering barriers that inhibit or prevent access to capital credit, thereby fostering the creation of more wealth through extension of capital credit and tax incentives for investment.

The mechanics of Capital Homesteading are, in general terms, simple and straightforward. This is due to the fact that binary economics accepts the principles of the Banking School. This means that banks can extend credit and create money by backing new demand deposits, promissory notes and other financial instruments with the present value of existing and future marketable goods and services instead of with existing accumulations of savings or government debt. Capital Homesteading avoids the circumlocutions and invalid arguments that adherence to the tenets of the Currency School requires as a matter of course.

As the central bank of the United States, the Federal Reserve has the power to monetize capital credit extended for qualified industrial, commercial, and agricultural purposes. That is, just as a commercial bank can create money without the necessity of existing accumulations of savings for its customers by discounting qualified loan paper, a central bank can create money without the necessity of existing accumulations of savings for commercial banks by rediscounting qualified loan paper of its member banks, or by purchasing qualified private sector loan paper and other negotiable instruments on the open (secondary) market.

Financed by the ability of the commercial banking system and the Federal Reserve to create money as needed without inflation or deflation (an "elastic currency," see § 1 of the Federal Reserve Act of 1913), every citizen would establish a tax-sheltered "Capital Homestead Account," or "CHA." Each "Capital Homesteader" would purchase and accumulate corporate equity shares or their equivalent that convey the full rights of ownership, such as full payout of profits in the form of dividends and full voting rights.

While it is unlikely that most people in the first generation of Capital Homesteaders would reach this amount, the CHA ceiling should be set at a generous $1 million. At a good ROI (Return on Investment) of 20%, this would provide an individual with $200,000 of disposable income out of which to meet all expenses and pay all taxes. Taxes, of course, would decrease overall as the $2 trillion in entitlements embedded in the federal budget was reduced as people became able to meet their own needs themselves.

In order to make access to ownership of the means of production truly democratic, no one would be required to finance the acquisition of capital using existing accumulations of savings. No one would have to use out-of-pocket cash, whether directly by using existing savings to purchase assets, or indirectly by using current accumulations as collateral — the more common use of existing accumulations.

It is critical to note that, contrary to the assumptions inherent in the tenets of the Currency School, no money is created until and unless capital with a present value is presented for financing. The fixed assumption of Currency School adherents, based on the dogma that only existing accumulations of savings can be used to finance capital formation, is that money is first created, then invested. This is only the case when government tries to monopolize "available" credit — the presumed "supply of loanable funds" — and collaborates with the central bank to create money backed by government debt. This is spent into the economy, presumably providing the reserves necessary to increase the money supply, but in reality giving the State tremendous influence in determining who owns what, and, especially, who may own at all.

Federal Reserve authorities would make a conservative estimate of the anticipated new capital needs for the upcoming quarter. This amount would be divided equally among citizens and legal residents and a voucher issued for capital credit in that amount. Again, this voucher would not itself be credit, but the right to obtain credit if the Capital Homesteader could locate a financially feasible capital project with a present value.

The Capital Homesteader would obtain a no-interest, non-recourse loan through his or her CHA for the purchase of a qualified investment. "No-interest" does not mean "free," however. There would be a one-time transaction fee for discounting the loan at the commercial bank, an annual risk premium for the purchase of capital credit insurance for collateral to secure the unpaid balance of the loan in the event of default, and the Federal Reserve discount rate to cover the cost of creating the money and administering the system.

All shares purchased for CHAs would include a "full payout" provision. That is, all earnings attributable to those shares would be paid into the CHA. To encourage full payout of all earnings (whether or not attributable to shares in a CHA), dividends would be tax deductible at the corporate level. If not used to make debt service payments for shares in a CHA, all dividends would be taxed as "ordinary income" at the individual level.

The proceeds of CHA loans could be invested in shares of: 1) the company where the citizen or a family member works, directly or through an ESOP, 2) the companies in which the citizen is a regular customer or supplier, and 3) a variety of blue-chip growth companies with a proven track record of profits.

To encourage CHAs, a "National Capital Credit Association" (NCCA) would be set up, to do what, e.g., Fannie Mae and Freddie Mac were intended to do in facilitating and securitizing home mortgages. The NCCA, which should be owned and controlled by CHA lenders and citizens, would package insured CHA loans, create software for helping lenders to scrutinize the feasibility of CHA loans, and set uniform standards for CHA insurers, reinsurers, and lenders.

The NCCA and competitors qualified by the Federal Reserve would then bundle and take these securitized CHA loans to the "Discount Window" of the regional Federal Reserve Bank. The Federal Reserve would treat these insured dividend-backed securities (DBSs) as it currently treats government debt paper, using them as backing for the currency as originally intended in the Federal Reserve Act of 1913. This would have the added benefit that as the Federal Government pays down the national debt, the productive assets of the private sector would stand behind the nation's money supply, whether coin, currency, or promissory notes and other financial vehicles.

A money supply linked to productive capital owned and controlled by the citizens would replace gold as a measure of value, and act as a safeguard against inflation and irresponsible or non-democratic monetary and fiscal policies by the nation's leaders and central bankers. Under Capital Homesteading, money will again be a servant of the people, not their master, and will become an instrument to promote humanity's creative potential and quest for a just market economy.

For the purposes of this survey, the next question is what specific reforms are required in order to implement Capital Homesteading at the earliest possible date and lay the foundation for a solid and sustainable economic recovery.